Flat Broke in the Year of the Bear

"It looks to me like we’re already in a recession," according to Jason Cooper of 1^st Source Investment Advisors (http://www.washingtonpost.com/wp-dyn/content/article/2008/01/19/AR2008011900018.html). Robert Reich reminds us that "a possible meltdown in an election year is downright frightening" to any politician, (http://www.salon.com/opinion/feature/2008/01/23/reich_economy/print.html), so no one wants to admit how bad things might be from the combination of a credit crunch (how Wall Street views this unpleasantness) and the housing "slump" (how Main Street sees it), and the only question is whose constituencies will receive the most government stimulus handouts. Not to worry, though, Kevin Hassett of the American Enterprise Institute wrote an op ed for the same Washington Post (http://www.alternet.org/bloggers/www.alternet.org/74466/) setting up various myths about recessions which he demolished by extolling the benefits of a downturn (example: you can’t make your car payment? Good, you’ll walk more and thus improve your health).

THE REAL TRUTH

The unmentionable truth is that the United States is going bankrupt. Broke. Insolvent. Our Post-World War II way of life is not sustainable on almost any level you choose to consider, and now the 60-year old chickens, so to speak, are coming home to roost and the feathers are hitting the fan. This means that not merely our suburban automobile-centric middle-class life styles but also our fundamental economic and political assumptions no longer fit reality and cannot be maintained. I remember that, when demobilization began after V-J Day, we were scared to death that the Great Depression would return because the economy would not be able to create jobs for over 10 million former soldiers suddenly turned civilians— that was one reason for the GI Bill of Rights which shuttled millions into school and off the job market.

Chalmers Johnson, author of "Nemesis: The Last Days of the American Republic," explains what happened next (http://www.alternet.org/story/74620). By 1949 we were deep into the Cold War, the Soviets had the atom bomb, the Chinese Communists had kicked Kuomintang butt off to Taiwan, we had a domestic recession, the Iron Curtain was in place in Eastern Europe, and we needed to get our act together pronto. Such interesting times resulted in the NSC-68, or National Security Council Report 68 signed by President Truman in September 1950, establishing America’s basic economic policies from then to now. Its basic premise was that "the American economy... can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living." Based on this, American strategic thinkers began, in effect, to spend the Soviet Union into collapse (my interpretation), by embarking on construction of a massive munitions industry which would not only defeat the Communists but also maintain full employment and abort any return of the Great Depression (Johnson’s interpretation).

By 1990 the value of the military-industrial complex thus created amounted to 83 percent of the value of all of the American manufacturing plants and equipment. The Soviet Union is long gone, but the defense budget rumbles on, bigger every year, although it is difficult to determine exact figures. By combing through the various budget appropriations, emergency expenditures, and allowances, Johnson figures that "U.S. spending for its military establishment during the current fiscal year (2008), conservatively calculated, (is) at least $1.1 trillion." The World’s total military expenditures (2004 estimate) were $1,100 billion, but the World total minus the U.S. was just $500 billion. Oh, we can afford this because we are the richest country in the world, right? No, CIA’s "World Factbook" tells us the world’s richest political entity is the European Union; we are number two, with China nipping at our heels and Japan a close fourth. Moreover, we are the world’s largest debtor nation, number 163 in current account deficit, which means we import more than we export and are unable to pay for all that stuff, so we finance the stuff by borrowing from, well, everybody else. Federal debt through all our history did not top $1 trillion until 1981. When George W. Bush became President in January 2001, it amounted to $5.7 trillion and since then has gone up 45 percent more to over $9 trillion.

What we have is a bloated military industry which is essentially mal-investment because it crowds out the civilian economy. The Center for Economic and Policy Research in May 2007 released a study by economist Dean Baker which concluded that, after an "initial demand stimulus," by year 6 the effects of military spending turned negative and, after 10 years, there were 464,000 fewer jobs than in a baseline scenario with lower defense spending." Baker’s conclusion was that "military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment." So much for the argument for what Johnson terms "military Keynesianism," that is, producing full employment and avoiding a Great Depression by excessive military spending. Did we really need such a massive military, more than we had for World War II? Did we really need 32,500 deliverable atomic and hydrogen bombs? Did we still need 9,960 in 2006? Are we more, or less secure? All this weaponry did not protect us from 9-11, so one wonders. 

STALE AND BYPASSED 

The industrial base of the United States has never really been updated since World War II because the military has sucked up funds which would otherwise have provided new capital investment for the regular economy. The U.S. Department of Defense during the period 1957-1987 used $7.62 trillion in capital resources (1982 dollars); a 1985 estimate by the Department of Commerce put the value of America’s plant and equipment (our infrastructure) at about $7.29 trillion, so, "in other words, the amount spent (by the military)... could have doubled the American capital stock or modernized and replaced the existing stock." Before globalization siphoned off our industry to more modern, cheaper foreign factories, we were already behind the eightball, importing massive amounts of equipment.

BYZANTINE FINANCING

Part and parcel of this distorted economic mal-investment was the financial structure developed based (in my estimation) on the Reagan-conservative theories of unregulated, de-regulated supposedly free markets. During Alan Greenspan’s confirmation hearings in1987 before Senator Proxmire and the Banking Committee, Proxmire worried that banks were heading toward massive concentration, pointing out they would need to be carefully regulated (primarily by the Federal Reserve which, actually, the banks owned— it is not a government department).

What happened was that under Greenspan banks merged and expanded "until they were no longer banks," trading for their own accounts, running hedge funds, offering mortgages (replacing savings and loans), securitizing mortgages, selling securitized mortgages in a whole zoo of fancy instruments CDOs, CBOs, etc., then selling credit derivatives offering protection against bankruptcy of the securitized mortgages, and so on, until all this financing exceeded actual economic output by at least a factor of 10 ("Whiskey and Gunpowder for 21 Jan 2008") Greenspan encouraged speculation, not long-term investment; credit expanded faster than production of real goods and services. At one point Greenspan admitted he wasn’t sure exactly what "money" was any more, since these so-called derivatives required no capital to back their promises yet, once they were brought into existence, they were "immediately integrated into the bouillabaisse of stocks, bonds, and cash savings. Physical objects were turned into tradable currency..." and absolutely none of these inventive financial geniuses could deduce exactly what they were worth. These are what Merrill Lynch and others are being forced to write off in the billions, and it is only just beginning. The house of cards is collapsing and I fear Mr. Bush’s $150 million stimulus package or the Fed’s reduction of the discount rate by 75 basis points are not long-run solutions which will short-circuit the disaster for long.

DOING PENANCE? 

Personal over-indulgence ("we can have it all, just charge it") and national policy hubris ( "we will bring democracy to the world whether they want it or not, and have all the oil we want as well because we are the greatest and richest ever") are heading for rehabilitation. It looks ominously as those many things are unraveling: climate change for whatever reason is accelerating, we are running out of potable water, desertification is rapidly proceeding across Africa and Mongolia, peak oil may well have already arrived, heretofore subservient brown people are getting uppity and demanding respect and the use of their own natural resources for themselves, females act like they think they should be President, there are signs of increased vulcanism around the Pacific rim and even in the U.S. of A., immigrants and refugees on every continent are on the move, the post-World War II financial system and American hegemony are dissolving, we are running out of fish to eat in the oceans, religious fundamentalists of various stripes demand it be their way or the highway, the list runs on and on. No wonder we have terrorists responding to these pressures, no wonder conservatives everywhere are angry, confused, and bellicose. It is clearly up to the damned liberals to think out of the box and cough up a new vision of reality and a hopeful future. Now, please.

Comments